-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FAy7Q7bnvwViIk6m6UAtHKj8aTvIjUt+CAgw81IyoKrY9azgqNSQvObxGbY3OPfQ S7gww6YouG0aNm32xlJXRA== 0000950124-01-001952.txt : 20010409 0000950124-01-001952.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950124-01-001952 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010326 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLOGG CO CENTRAL INDEX KEY: 0000055067 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 380710690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-04171 FILM NUMBER: 1590495 BUSINESS ADDRESS: STREET 1: ONE KELLOGG SQ STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016-3599 BUSINESS PHONE: 6169612000 MAIL ADDRESS: STREET 1: ONE KELLOGG SQUARE STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016-3599 8-K 1 k61222e8-k.txt FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 2059 -------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 MARCH 26, 2001 Date of Report (Date of Earlier Event Report) KELLOGG COMPANY (Exact Name of Registrant as Specified in its Charter) Delaware 1-4171 38-0710690 (State or other jurisdiction of (Commission File Number) (IRS Employer Identification incorporation) Number)
ONE KELLOGG SQUARE BATTLE CREEK, MICHIGAN 49016-3599 (Address of principal executive offices)(zip code) (616) 961-2000 (Registrant's telephone number, including area code) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On March 26, 2001, Kellogg Company, a Delaware corporation (the "Registrant"), completed its acquisition of Flowers Industries, Inc., a Georgia corporation ("Flowers Industries"), through the merger (the "Flowers Merger") of Kansas Merger Subsidiary, Inc., a Delaware corporation and wholly owned subsidiary of the Registrant ("Flowers Merger Subsidiary"), with and into Flowers Industries, pursuant to the Agreement and Plan of Restructuring and Merger, dated as of October 26, 2000, by and among Flowers Industries, the Registrant and Flowers Merger Subsidiary. Prior to the Registrant's acquisition of Flowers Industries, Flowers Industries transferred all of its assets, other than its Keebler Foods Company stock, and certain of its liabilities to a wholly-owned subsidiary, and then distributed the stock of this subsidiary to its stockholders in a spin-off. As a result of the Flowers Merger, Flowers Industries became a wholly owned subsidiary of the Registrant and each share of Flowers Industries common stock, par value $0.625 per share, outstanding on March 26, 2001, was converted into the right to receive $12.50 in cash. Also on March 26, 2001, the Registrant completed its acquisition of Keebler Foods Company, a Delaware corporation ("Keebler"), through the merger (the "Keebler Merger," and together with the Flowers Merger, the "Mergers") of FK Merger Subsidiary, Inc., a Delaware corporation and wholly owned subsidiary of the Registrant, with and into Keebler, pursuant to the Agreement and Plan of Merger, dated as of October 26, 2000, by and among Keebler, the Registrant and FK Acquisition Corp., a Georgia corporation. As a result of the Keebler Merger, Keebler became a wholly owned subsidiary of the Registrant and each share of Keebler common stock, par value $0.01 per share, outstanding on March 26, 2001 (other than shares of Keebler common stock held by Flowers Industries), was converted into the right to receive $42.00 in cash. The acquisition of Keebler had a transaction value of approximately $4.5 billion, including the assumption (or repayment) of approximately $700 million in debt. The acquisition was financed through a private placement of short-term and long-term debt securities, including the Registrant's 5.50% Notes due 2003, 6.00% Notes due 2006, 6.60% Notes due 2011 and 7.45% Notes due 2031. A copy of the press release issued by the Registrant on March 26, 2001, regarding the Mergers is attached as Exhibit 99.1 hereto and is hereby incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired. The required financial statements for Keebler Foods Company are listed in Exhibit 99.2 hereto and are hereby incorporated by reference. (b) Pro forma financial information. Pro forma financial information related to the Registrant's acquisition of Keebler on March 26, 2001 is filed as Exhibit 99.3 hereto and is hereby incorporated by reference. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 8-K, together with the information attached as Exhibits hereto, contains "forward-looking statements" discussing, among other things, projections concerning volumes, sales, operating profit growth, gross profit margins, selling, general and administrative expenses as a percentage of net sales, effective income tax rates, capital spending, the impact of acquisitions and dispositions, as well as savings, headcount reductions and future cash outlays related to streamlining initiatives. Forward-looking statements include predictions of future results and may contain the words "expects," "believes," "will," "will deliver," "anticipates," "projects," or words or phrases of similar meaning. 2 3 The Registrant's actual results for future periods could differ materially from the opinions and statements expressed with respect to future periods. In particular, the Registrant's future results could be affected by factors relating to the recently completed acquisition of Keebler, including integration problems, the failure to achieve synergies, unanticipated liabilities and the substantial amount of indebtedness incurred to finance the acquisition. In addition, the Registrant's future results could be affected by a variety of other factors, including, - competitive conditions in our markets; - marketing spending levels and pricing actions of competitors; - the impact of competitive conditions, marketing spending and/or incremental pricing actions on actual volumes and product mix; - effectiveness of advertising and marketing spending or programs; - the success of new product introductions; - the availability of and interest rates on short-term financing; - the levels of spending on system initiatives, properties, business opportunities, integration of acquired businesses and other general and administrative costs; - commodity price and labor cost fluctuations; - changes in consumer preferences; - changes in U.S. or foreign regulations affecting the food industry; - expenditures necessary to carry out streamlining initiatives and savings derived from these initiatives; and - foreign economic conditions, including currency rate fluctuations. These and the other factors elsewhere in this current report herein are not necessarily all of the important factors that could cause our results to differ materially from those expressed in all of our forward-looking statements. Forward-looking statements speak only as of the date they were made and we undertake no obligation to update them. (c) Exhibits. 2.1 Agreement and Plan of Restructuring and Merger, dated as of October 26, 2000, by and among Flowers Industries, Inc., Kellogg Company and Kansas Merger Subsidiary, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Kellogg Company on November 7, 2000). 2.2 Agreement and Plan of Merger, dated as of October 26, 2000, by and among Keebler Foods Company, Kellogg Company and FK Acquisition Corp. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Kellogg Company on November 7, 2000). 99.1 Press release, dated March 26, 2001, issued by Kellogg Company. 99.2 Audited consolidated balance sheets and related statements of operations, shareholders' equity and cash flows of Keebler Foods Company and subsidiaries at December 30, 2000 and January 1, 2000 and for each of the three years in the period ended December 30, 2000 (incorporated by reference to pages F-1 through F-33 of the Keebler Foods Company Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (the "Keebler 2000 10-K")). 99.3 Pro forma financial information related to the Keebler Foods Company acquisition. 99.4 Consent of PricewaterhouseCoopers LLP. 99.5 Copies of pertinent pages of the Keebler 2000 10-K being incorporated by reference. 3 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized. KELLOGG COMPANY By: /s/ Gary H. Pilnick -------------------- Name: Gary H. Pilnick Title: Vice President Deputy General Counsel Date: March 30, 2001 4 5 EXHIBIT INDEX 2.1 Agreement and Plan of Restructuring and Merger, dated as of October 26, 2000, by and among Flowers Industries, Inc., Kellogg Company and Kansas Merger Subsidiary, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Kellogg Company on November 7, 2000). 2.2 Agreement and Plan of Merger, dated as of October 26, 2000, by and among Keebler Foods Company, Kellogg Company and FK Acquisition Corp. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed by Kellogg Company on November 7, 2000). 99.1 Press release, dated March 26, 2001, issued by Kellogg Company. 99.2 Audited consolidated balance sheets and related statements of operations, shareholders' equity and cash flows of Keebler Foods Company and subsidiaries at December 30, 2000 and January 1, 2000 and for each of the three years in the period ended December 30, 2000 (incorporated by reference to pages F-1 through F-33 of the Keebler 2000 10-K). 99.3 Pro forma financial information related to the Keebler Foods Company acquisition. 99.4 Consent of PricewaterhouseCoopers LLP. 99.5 Copies of pertinent pages of the Keebler 2000 10-K being incorporated by reference. EX-99.1 2 k61222ex99-1.txt PRESS RELEASE, DATED 3/26/01 1 EXHIBIT 99.1 [KELLOGG'S LOGO] [KELLOGG COMPANY NEWS LETTERHEAD] KELLOGG COMPLETES ACQUISITION OF KEEBLER THE PAYOFF: DIVERSIFICATION, DSD, SCALE, AND COST SYNERGIES BATTLE CREEK, Mich. -- By completing the acquisition of Keebler Foods Company today, Kellogg Company has put in place the most critical element of its growth plan. "These two great companies are a winning combination for consumers, customers, and share owners," said Kellogg Chairman and Chief Executive Officer Carlos M. Gutierrez. "Thanks to five months of integration preparation by Kellogg and Keebler people, we will hit the ground running." The new Kellogg Company's growth will be propelled by: - A MORE DIVERSIFIED PORTFOLIO, with products that rank first or second in U.S. sales in seven major food categories. Keebler is number two in the cookie and cracker segments, both growing faster than most other U.S. food categories. - - KEEBLER'S DIRECT STORE DOOR (DSD) delivery system, which is expected to increase the growth potential of Kellogg snack food such as Rice Krispies Treats squares and Nutri-Grain bars. - - GREATER SCALE in the United States, including a stronger presence in traditional supermarkets and in non-traditional channels such as convenience and gas stores, vending, foodservice, club stores, and mass merchandise stores. - - COST SYNERGIES, which are expected to reach $170 million annually over three years, increasing Kellogg's financial flexibility and the visibility of its earnings. "We are building a new, stronger Kellogg Company," Gutierrez said of the expanded company, which has projected annual sales of more than $9 billion. "In addition to our cookie and cracker franchises, Kellogg is number one in the world in ready-to-eat cereal sales and number one in the United States in toaster pastries, cereal/granola/treat bars, frozen waffles, and meat alternatives." - more - 2 -2- Eleven Kellogg and Keebler brands had 2000 retail sales of at least $100 million in the United States, including: - Kellogg's cereal -- $2.5 billion, - Keebler cookies and crackers -- $1.3 billion, - Pop-Tarts toaster pastries -- $500 million, - Eggo waffles -- $390 million, - Cheez-It crackers -- $313 million, - Nutri-Grain cereal bars -- $230 million, - Rice Krispies Treats squares -- $150 million, - Murray cookies -- $143 million, - Austin snacks -- $129 million, - Morningstar Farms products -- $120 million, and - Famous Amos cookies -- $100 million. The acquisition brings together not only Kellogg's cereals and convenience foods with Keebler's cookies and crackers, but also world-famous Kellogg icons such as Tony the Tiger and Snap! Crackle! Pop! with the popular Keebler Elves and their Hollow Tree. "This combination of equity power represents, in itself, a great opportunity for growth," Gutierrez said. Sam K. Reed, who has served as president and CEO of Keebler since 1996, today becomes vice chairman and a member of the Board of Directors of Kellogg Company. "We are extremely pleased that Sam Reed will be part of the Kellogg team," Gutierrez said. "He brings a great track record in the food industry, including a well-deserved reputation for delivering superior results." Under Reed's leadership, Keebler has achieved consistent sales and earnings growth through both internal initiatives and strategic acquisitions. Prior to joining Keebler, Reed was president and chief operating officer of Western Bakery Group from 1994 to 1995 and Mother's Cake and Cookie Company from 1991 to 1994. Prior to that, he held executive vice president positions at President Baking Company, Wyndham Bakery Products, and Murray Bakery Products from 1985 to 1990. - more - 3 -3- "Kellogg and Keebler are an uncommonly good combination," Reed said, "Both companies are better together. I've been a part of many food company integrations, and I'm convinced that Kellogg-Keebler will be the best of them all." Keebler will continue to be headquartered in Elmhurst, Illinois, operating as a part of Kellogg USA. David B. Vermylen, who has been president of the Keebler Brands Division, today becomes president and chief executive officer of Keebler and senior vice president of Kellogg Company. Kellogg reached agreement on October 26, 2000, to acquire Keebler in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Approval earlier today by Flowers share owners was the final step leading to the closing of the transaction. Under terms of the acquisition, the largest in Kellogg's 95-year history, Kellogg will pay $42 for each of Keebler's shares and assume Keebler's debt, for a total investment of about $4.5 billion. Kellogg is financing the acquisition through a combination of short-term and long-term debt. The transaction is expected to be accretive to Kellogg's cash earnings per share in year one. Separately, Kellogg today reaffirmed its previous guidance for 2001 first quarter and full-year earnings per share. The company expects to report first quarter results on April 26. ABOUT KELLOGG COMPANY Headquartered in Battle Creek, Michigan, Kellogg Company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and cones. The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Special K, Murray, Austin, Morningstar Farms, Famous Amos, Carr's, Plantation, Ready Crust, and Kashi. Kellogg products are manufactured in 19 countries and marketed in more than 160 countries around the world. For more information, visit Kellogg's web site at http://www.kelloggs.com or Keebler's web site at http://www.keebler.com. -more- 4 -4- FORWARD-LOOKING STATEMENTS DISCLOSURE This news release contains forward-looking statements related to strategy, the acquisition and integration of Keebler, cost synergies, cash earnings per share and growth potential. Actual performance may differ materially from these statements due to factors related to the Keebler acquisition, including integration problems, failures to achieve synergies, unanticipated liabilities, and the substantial amount of indebtedness incurred to finance the acquisition (which could, among other things, hinder the company's ability to adjust rapidly, make the company more vulnerable to a downturn, and place the company at a competitive disadvantage to less-leveraged companies); competitive conditions and their impact; pricing and promotional spending; the effectiveness of marketing spending and programs; the success of new product introductions; the availability of and interest rates on short-term financing; commodity price and labor cost fluctuations; changes in consumer preferences; economic factors such as interest rates, statutory tax rates, and foreign currency translations; and other factors. ### EX-99.3 3 k61222ex99-3.txt PROFORMA FINANCIAL INFORMATION 1 EXHIBIT 99.3 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial statements give effect to (1) our acquisition of Keebler Foods Company and (2) the offering of $4.6 billion in aggregate principal amount of debt securities to be used to repay short-term indebtedness, including the indebtedness incurred in connection with the Keebler acquisition. To implement the Keebler acquisition, we acquired all of the outstanding stock of Keebler's controlling stockholder, Flowers Industries, Inc., in a merger. Prior to our acquisition of Flowers, Flowers transferred all of its assets, other than its Keebler stock, and certain of its liabilities to a wholly owned subsidiary, and then distributed all of the stock of this subsidiary to its stockholders in a spin-off. Keebler then merged with a wholly owned subsidiary of Kellogg. As part of this merger, all of the outstanding stock of Keebler, other than the stock owned by Flowers, converted into the right to receive the cash merger consideration. As a result of these transactions, Kellogg owns 100% of the outstanding stock of Keebler. Pro forma adjustments related to the pro forma combined balance sheet have been determined assuming these transactions were consummated on December 31, 2000. The pro forma combined balance sheet combines our consolidated balance sheet as of December 31, 2000 with Keebler's consolidated balance sheet as of December 30, 2000. The pro forma combined income statement combines the companies' respective income statements as if the combination had occurred at the beginning of the period presented. The unaudited pro forma combined financial statements are based on the assumptions and adjustments described in the accompanying notes. The pro forma combined income statement is not necessarily indicative of operating results that would have been achieved had the combination been consummated as of the beginning of the period presented and should not be construed as representative of future operations. You should read the pro forma combined financial statements in conjunction with the historical consolidated financial statements, including the related notes, filed as part of our Annual Report on Form 10-K for the year ended December 31, 2000. 2 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN MILLIONS, EXCEPT PER SHARE DATA)
KELLOGG KEEBLER PRO FORMA ACTUAL ACTUAL(A) ADJUSTMENTS PRO FORMA -------- --------- ----------- --------- Net sales......................................... $6,954.7 $2,757.0 $ (61.7) (1) $9,650.0 Cost of goods sold................................ 3,327.0 1,119.1 (61.7) (1) 4,545.2 160.8 (2) Selling, general and administrative expense....... 2,551.4 1,310.4 97.5 (3) 3,798.8 (160.5) (2) Restructuring charges............................. 86.5 (1.0) 85.5 -------- -------- ------- -------- Operating profit................................ 989.8 328.5 (97.8) 1,220.5 Interest expense.................................. 137.5 48.8 253.5 (4) 439.8 Other income (expense), net....................... 15.4 4.7 0.3 (2) 20.4 -------- -------- ------- -------- Income before taxes............................. 867.7 284.4 (351.0) 801.1 Income taxes...................................... 280.0 108.8 (114.3) (5) 274.5 -------- -------- ------- -------- Net income...................................... $ 587.7 $ 175.6 $(236.7) $ 526.6 ======== ======== ======= ======== Net earnings per share: basic and diluted......... $ 1.45 $ 1.30 Average shares outstanding........................ 405.6 405.6
- --------------- (a) Keebler's operating results are for the fiscal year ended December 30, 2000. 3 UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 2000 (IN MILLIONS)
KELLOGG KEEBLER PRO FORMA ACTUAL ACTUAL(A) ADJUSTMENTS PRO FORMA -------- --------- ----------- --------- Current assets: Cash and cash equivalents..................... $ 204.4 $ 34.2 $ -- $ 238.6 Accounts receivable, net...................... 685.3 43.5 -- 728.8 Inventories................................... 443.8 164.8 1.2 (6) 609.8 Income tax receivable......................... -- 19.4 80.0 (7) 99.4 Other current assets.......................... 273.3 66.9 (13.7) (8) 326.5 -------- -------- -------- --------- Total current assets.................. 1,606.8 328.8 67.5 2,003.1 Property, net................................... 2,526.9 629.5 (29.5) (9) 3,126.9 Other assets.................................... 762.6 814.6 3,986.6 (10) 5,563.8 -------- -------- -------- --------- Total assets.......................... $4,896.3 $1,772.9 $4,024.6 $10,693.8 ======== ======== ======== ========= Current liabilities: Current maturities of long-term debt.......... $ 901.1 $ 55.1 $ (55.1) (12) $ 901.1 Notes payable................................. 485.2 -- (265.8) (12) 219.4 Accounts payable.............................. 388.2 145.1 -- 533.3 Income taxes payable.......................... 130.8 -- -- 130.8 Other current liabilities..................... 587.3 231.3 87.7 (11) 906.3 -------- -------- -------- --------- Total current liabilities............. 2,492.6 431.5 (233.2) 2,690.9 Long-term debt.................................. 709.2 527.6 4,210.7 (12) 5,447.5 Deferred income taxes........................... 266.7 134.6 537.6 (8) 938.9 Other liabilities............................... 530.3 116.5 72.2 (13) 719.0 -------- -------- -------- --------- Total liabilities..................... 3,998.8 1,210.2 4,587.3 9,796.3 -------- -------- -------- --------- Shareholders' equity: Common stock.................................. 103.8 0.9 (0.9) (14) 103.8 Capital in excess of par value................ 102.0 208.5 (208.5) (14) 102.0 Retained earnings............................. 1,501.0 393.3 (393.3) (14) 1,501.0 Treasury stock................................ (374.0) (40.0) 40.0 (14) (374.0) Accumulated other comprehensive income........ (435.3) -- -- (435.3) -------- -------- -------- --------- Total shareholders' equity............ 897.5 562.7 (562.7) 897.5 -------- -------- -------- --------- Total liabilities and shareholders' equity.............................. $4,896.3 $1,772.9 $4,024.6 $10,693.8 ======== ======== ======== =========
- --------------- (a) Keebler's balance sheet is as of December 30, 2000. 4 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION A. General The pro forma combined balance sheet reflects our acquisition of Keebler for an aggregate estimated purchase price of approximately $4,439.5 million. We calculated the purchase price as follows (in millions): Acquisition of equity ($42 per share)...................... $3,584.6 Assumed debt of Keebler.................................... 587.8 Payment to Keebler option holders.......................... 205.2 Transaction costs.......................................... 61.9 -------- $4,439.5 ========
The actual amount of debt assumed in the transaction (including amounts paid off as of the closing date of March 26, 2001) was approximately $700 million, increasing the total value of the transaction to approximately $4.55 billion. The excess of the purchase price over the fair value of net tangible and intangible assets acquired has been allocated to goodwill. B. Computation of Net Earnings Per Share Basic net earnings per share is determined by dividing net income by the weighted average number of common shares outstanding. Diluted net earnings per share is determined by dividing net income by the weighted average number of common shares outstanding, giving effect to all potentially dilutive issuances of common shares. Dilution in all periods presented was less than $.01 per share. C. Pro Forma Combined Financial Data Compared to Historical Data Pro forma adjustments related to the pro forma combined balance sheet have been determined assuming the acquisition was consummated at December 31, 2000. The assets and liabilities of Keebler have been included on the pro forma combined balance sheet at fair value, as determined by appraisal and valuation, where appropriate. Pro forma adjustments to the combined balance sheet also reflect certain accruals for employee termination and facility exit costs. Pro forma adjustments related to the pro forma combined income statement have been determined assuming the combination was consummated as of the beginning of the period presented. The pro forma combined results of operations vary from the combined historical results of Kellogg and Keebler due to the following: (1) Adjustment to eliminate sales from Keebler to Kellogg, which are treated as intercompany sales for the purposes of the combined pro forma financial statements. (2) Adjustment to conform the classification of expenses between cost of goods sold, selling, general and administrative expense and other income (expense). (3) Adjustment to amortization expense to reflect the amortization of intangible assets, including goodwill, which would have resulted had the combination occurred at the beginning of the period presented. Intangible assets have been amortized on the straight-line basis over the following useful lives (in millions):
INTANGIBLE CATEGORY ESTIMATED VALUE USEFUL LIFE - ------------------- --------------- ----------- Goodwill.......................................... $2,842.0 40 years Direct store door delivery system................. 590.0 40 years Trademarks........................................ 1,310.0 40 years
This adjustment is based on our current estimates and is lower than the earlier estimate in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of Kellogg Company's 2000 SEC Form 10-K. 5 (4) Adjustment to interest expense to recognize additional debt of $4,301.2 million incurred to finance the Keebler acquisition. The amount of this additional debt is equal to the pro forma purchase price of $4,439.5 million less the $138.3 million of indebtedness assumed that is not currently contemplated to be repaid. An average rate of 6.7% was used to compute the incremental interest expense, which includes the effect of interest rate hedges and the amortization of financing fees. Financing of the transaction was through the issuance of short-term and long-term debt. (5) Adjustment to present the tax effect of additional interest expense and deductible amortization of intangible assets computed at the rate of 39%. (6) Fair value adjustment of acquired finished goods inventory to retail value, less selling and distribution expenses. (7) Adjustment to record tax receivable related to the payments made to holders of Keebler stock options. (8) Adjustment to record deferred tax effect of fair value adjustments to Keebler's opening balance sheet. (9) Fair value adjustment for Keebler property and equipment. (10) Adjustment primarily to record goodwill and other intangible assets. (11) Adjustment primarily to record liabilities for facility exit costs and employee severance. (12) Adjustment to record the issuance of the securities being offered and the repayment of short-term notes, as described in Note 4 above. (13) Fair value adjustment for certain Keebler pension and other post-retirement benefit plans based upon actuarial valuations. (14) Adjustment to eliminate Keebler's equity accounts as a result of the acquisition. EX-99.4 4 k61222ex99-4.txt CONSENT OF PRICEWATERHOUSECOOPERS LLC 1 EXHIBIT 99.4 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Current Report on Form 8-K of Kellogg Company dated April 2, 2001 of our report dated January 31, 2001 on our audit of the consolidated financial statements of Keebler Foods Company and Subsidiaries for the year ending December 30, 2000 appearing in the Form 10-K of Keebler Foods Company for the year ended December 30, 2000. April 2, 2001 Chicago, Illinois EX-99.5 5 k61222ex99-5.txt EXHIBIT 99.5 1
EXHIBIT 99.5 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Keebler Foods Company and Subsidiaries FINANCIAL STATEMENTS: PAGE ---- Report of Independent Accountants....................................................................... F-2 Consolidated Balance Sheets at December 30, 2000 and January 1, 2000.................................... F-3 Consolidated Statements of Operations for the years ended December 30, 2000, January 1, 2000 and January 2, 1999....................................................................................... F-5 Consolidated Statements of Shareholders' Equity for the years ended December 30, 2000, January 1, 2000 and January 2, 1999.............................................................................. F-6 Consolidated Statements of Cash Flows for the years ended December 30, 2000, January 1, 2000 and January 2, 1999....................................................................................... F-7 Notes to the Consolidated Financial Statements.......................................................... F-8 FINANCIAL STATEMENT SCHEDULE: Report of Independent Accountants....................................................................... S-1 Schedule II - Valuation and Qualifying Accounts......................................................... S-2 F-1
2 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Keebler Foods Company and Subsidiaries at December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois January 31, 2001 F-2 3 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 30, 2000 January 1, 2000 ------------------ ------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 34,172 $ 20,717 Trade accounts and notes receivable, net 43,545 65,052 Inventories, net: Raw materials 20,751 34,243 Package materials 17,104 13,907 Finished goods 124,955 126,954 Other 2,001 1,176 ------------------ ------------------ 164,811 176,280 Income taxes receivable 19,388 - Deferred income taxes 36,470 46,252 Other 30,433 27,278 ------------------ ------------------ Total current assets 328,819 335,579 PROPERTY, PLANT AND EQUIPMENT, NET 629,548 553,031 GOODWILL, NET 523,606 370,188 TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET 237,332 211,790 PREPAID PENSION 37,846 33,240 ASSETS HELD FOR SALE 1,159 6,662 OTHER ASSETS 14,578 17,693 ------------------ ------------------ Total assets $ 1,772,888 $ 1,528,183 ================== ================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3
4 KEEBLER FOODS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 30, 2000 January 1, 2000 ------------------ ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 55,058 $ 37,283 Trade accounts payable 145,125 147,862 Other liabilities and accruals 222,676 237,447 Income taxes payable - 23,603 Plant and facility closing costs and severance 8,624 11,290 ------------------ ------------------ Total current liabilities 431,483 457,485 LONG-TERM DEBT 527,587 419,160 OTHER LIABILITIES: Deferred income taxes 134,575 124,389 Postretirement/postemployment obligations 62,497 64,383 Plant and facility closing costs and severance 8,628 12,062 Deferred compensation 25,796 24,581 Other 19,648 16,808 ------------------ ------------------ Total other liabilities 251,144 242,223 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 100,000,000 shares authorized and none issued) - - Common stock ($.01 par value; 500,000,000 shares authorized and 86,390,807 and 84,655,874 shares issued, respectively) 863 846 Additional paid-in capital 208,461 182,686 Retained earnings 393,362 255,813 Treasury stock (40,012) (30,030) ------------------ ------------------ Total shareholders' equity 562,674 409,315 ------------------ ------------------ Total liabilities and shareholders' equity $ 1,772,888 $ 1,528,183 ================== ================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4
5 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended ---------------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- -------------------- -------------------- NET SALES $ 2,756,950 $ 2,667,771 $ 2,226,480 COSTS AND EXPENSES: Cost of sales 1,119,117 1,150,553 938,896 Selling, marketing and administrative expenses 1,284,651 1,227,481 1,080,044 Other 25,707 25,834 11,501 Restructuring and impairment (credit) charge (996) 66,349 - -------------------- -------------------- -------------------- INCOME FROM OPERATIONS 328,471 197,554 196,039 Interest (income) (4,731) (1,700) (3,763) Interest expense 48,842 37,874 30,263 -------------------- -------------------- -------------------- INTEREST EXPENSE, NET 44,111 36,174 26,500 -------------------- -------------------- -------------------- INCOME BEFORE INCOME TAX EXPENSE 284,360 161,380 169,539 Income tax expense 108,768 73,175 72,962 -------------------- -------------------- -------------------- INCOME BEFORE EXTRAORDINARY ITEM 175,592 88,205 96,577 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of tax - - 1,706 -------------------- -------------------- -------------------- NET INCOME $ 175,592 $ 88,205 $ 94,871 ==================== ==================== ==================== BASIC NET INCOME PER SHARE: Income before extraordinary item $ 2.07 $ 1.05 $ 1.16 Extraordinary item - - 0.02 -------------------- -------------------- -------------------- Net income $ 2.07 $ 1.05 $ 1.14 ==================== ==================== ==================== WEIGHTED AVERAGE SHARES OUTSTANDING 84,517 83,759 83,254 ==================== ==================== ==================== DILUTED NET INCOME PER SHARE: Income before extraordinary item $ 2.00 $ 1.01 $ 1.10 Extraordinary item - - 0.02 -------------------- -------------------- -------------------- Net income $ 2.00 $ 1.01 $ 1.08 ==================== ==================== ==================== WEIGHTED AVERAGE SHARES OUTSTANDING 87,840 87,645 87,486 ==================== ==================== ==================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5
6 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK ----------------------- PAID-IN RETAINED ----------------------- SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT JANUARY 3, 1998 77,638 $ 776 $ 148,613 $ 72,737 (43) $ (75) $ 222,051 Exercise of Bermore warrant 6,136 61 19,740 - - - 19,801 Purchase of treasury shares - - - - (292) (8,605) (8,605) Exercise of employee stock options 351 4 1,179 - - - 1,183 Net income - - - 94,871 - - 94,871 ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT JANUARY 2, 1999 84,125 841 169,532 167,608 (335) (8,680) 329,301 Purchase of treasury shares - - - - (646) (21,350) (21,350) Exercise of employee stock options 531 5 13,154 - - - 13,159 Net income - - - 88,205 - - 88,205 ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT JANUARY 1, 2000 84,656 846 182,686 255,813 (981) (30,030) 409,315 Purchase of treasury shares - - - - (353) (9,982) (9,982) Exercise of employee stock options 1,735 17 25,775 - - - 25,792 Dividends paid - - - (38,043) - - (38,043) Net income - - - 175,592 - - 175,592 ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 30, 2000 86,391 $ 863 $ 208,461 $ 393,362 (1,334) $ (40,012) $ 562,674 =========== =========== =========== =========== =========== =========== =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6
7 KEEBLER FOODS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended ------------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ------------------- ------------------- CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES Net income $ 175,592 $ 88,205 $ 94,871 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 95,280 84,125 69,125 Deferred income taxes 27,074 (11,248) 10,075 Loss on early extinguishment of debt, net of tax - - 1,706 (Gain) loss on sale of property, plant and equipment (1,435) 1,799 424 Gain on sale of value brands business (5,700) - - Restructuring and impairment (credit) charge (615) 46,071 - Income tax benefit related to stock options exercised 19,366 9,956 - Other - - 1,460 Changes in assets and liabilities: Trade accounts and notes receivable, net 11,712 (26,975) (5,082) Inventories, net 19,536 (9,903) (13,830) Income taxes payable (41,855) 12,824 (4,556) Other current assets (2,052) (642) (2,845) Trade accounts payable and other current liabilities (31,722) 9,840 869 Plant and facility closing costs and severance (19,764) (3,641) (5,373) Other, net (2,604) 6,771 (2,319) ------------------- ------------------- ------------------- Cash provided from operating activities 242,813 207,182 144,525 CASH FLOWS USED BY INVESTING ACTIVITIES Capital expenditures (92,598) (100,685) (66,798) Proceeds from property disposals 8,953 3,904 917 Purchase of Sesame Street license (10,000) - - Proceeds from sale of value brands business 17,000 - - Purchase of Austin Quality Foods, Inc., net of cash acquired (253,797) - - Purchase of President International, Inc., net of cash acquired - - (444,818) ------------------- ------------------- ------------------- Cash used by investing activities (330,442) (96,781) (510,699) CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES Purchase of treasury stock (9,982) (21,350) (8,605) Exercise of employee stock options and warrant 6,426 3,203 20,577 Proceeds from receivables securitization 21,000 103,000 - Deferred debt issue costs - - (1,845) Long-term debt borrowings - - 425,000 Long-term debt repayments (43,317) (113,052) (157,626) Revolving facility, net 165,000 (85,000) 85,000 Dividends paid (38,043) - - ------------------- ------------------- ------------------- Cash provided from (used by) financing activities 101,084 (113,199) 362,501 ------------------- ------------------- ------------------- Increase (decrease) in cash and cash equivalents 13,455 (2,798) (3,673) Cash and cash equivalents at beginning of period 20,717 23,515 27,188 ------------------- ------------------- ------------------- Cash and cash equivalents at end of period $ 34,172 $ 20,717 $ 23,515 =================== =================== =================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-7
8 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION BUSINESS AND OWNERSHIP Keebler Foods Company (the "Company" or "Keebler"), a manufacturer and distributor of food products, was acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO was owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a privately held corporation and the parent of G.F. Industries, Inc. ("GFI") and certain members of Keebler's current management. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger"), and subsequently changed its name to Keebler Foods Company. The financial statements as of and for all periods subsequent to January 26, 1996 have been restated to reflect the Merger as if it had been effective January 26, 1996. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock (the "Offering"). As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore so that its ownership of outstanding stock increased to approximately 55%. Concurrent with the Offering, Bermore exercised a warrant to purchase 6,135,781 shares of common stock that had been issued in conjunction with the acquisition of Sunshine Biscuits, Inc. ("Sunshine"). The exercise of the warrant resulted in Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all of the shares in the Offering, without any of the proceeds going to Keebler. In addition, during 1998, Bermore, through a series of transactions, transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited company. On January 21, 1999, Keebler made a secondary public offering of 16,200,000 shares of common stock. Artal and Claremont sold all of the shares, without any proceeds going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and Flowers' ownership remained at approximately 55%. During 1999, all remaining shares owned by both Artal and Claremont were sold in the open market. Keebler is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine, President International, Inc. ("President"), Keebler Leasing Corp., Keebler Funding Corporation and Johnston's Ready Crust Company. On January 4, 1999, Keebler engaged in a series of corporate-entity transactions that resulted in Sunshine and President being merged into Keebler Company. Consequently, these former subsidiaries of Keebler Foods Company are currently wholly-owned subsidiaries of Keebler Company. Additional operating subsidiaries of Keebler Company include Elfin Equity Company, L.L.C., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C. and Godfrey Transport, Inc. On March 6, 2000, Keebler Foods Company acquired Austin Quality Foods, Inc. ("Austin") from R&H Trust Co. (Jersey) Limited, as Trustee, HB Marketing & Franchising L.P., 697163 Alberta Ltd., and William C. Burkhardt. On July 19, 2000, Flowers Industries and Keebler Foods Company jointly announced that their respective boards of directors had authorized each of the companies to explore alternatives for the maximization of shareholder value, including the potential sale of Keebler. On October 26, 2000, Flowers Industries announced that it reached an agreement that will result in the sale of Keebler Foods Company to Kellogg Company ("Kellogg") for $42.00 per share. Kellogg also reached an agreement to acquire the remaining Keebler shares held by the public for $42.00 per share. FISCAL YEAR Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 2000, 1999 and 1998 fiscal years each consisted of fifty-two weeks. PRINCIPLES OF CONSOLIDATION All subsidiaries are wholly-owned and included in the consolidated financial statements of Keebler. Intercompany accounts and transactions have been eliminated. F-8 9 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) GUARANTEES OF NOTES The subsidiaries of Keebler that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of Keebler's consolidated assets, revenues, income or equity), individually and in the aggregate, to the consolidated financial statements of Keebler. The guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes. RECLASSIFICATIONS Certain reclassifications of prior years' data have been made to conform with the current year reporting. 2. SALE OF THE COMPANY On October 26, 2000, Kellogg Company announced it reached an agreement to acquire Keebler Foods Company in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Completion of the merger is subject to customary closing conditions and regulatory approvals. There can be no assurance that such approvals will be obtained. The transaction is expected to close during the first quarter of 2001. Immediately prior to the effective time of the merger, Keebler will declare a special cash dividend in the aggregate amount of $16 million, which is to be paid pro rata to all Keebler stockholders, including Flowers. This special dividend will be in addition to any regular dividends declared and paid as permitted under the merger agreement. 3. ACQUISITIONS ACQUISITION OF AUSTIN QUALITY FOODS, INC. On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. from R&H Trust Co. (Jersey) Limited, as Trustee, HB Marketing & Franchising L.P., 697163 Alberta Ltd., and William C. Burkhardt, for a purchase price, net of cash acquired, of $253.8 million, excluding related fees and expenses paid of approximately $3.0 million. The acquisition of Austin was a cash transaction funded with approximately $235.0 million from borrowings under the $700.0 million Senior Credit Facility Agreement dated September 28, 1998, and the remainder from cash received on additional sales of accounts receivable under Keebler's Receivables Purchase Agreement. The acquisition of Austin by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of Austin based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $167.7 million, which is being amortized on a straight-line basis over a forty year period. Results of operations for Austin from March 6, 2000 to December 30, 2000 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of fiscal year 1999. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the Austin acquisition been effected on the assumed date. F-9 10 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) Unaudited (IN MILLIONS EXCEPT PER SHARE DATA) For the Years Ended ---------------------------------------- December 30, 2000 January 1, 2000 ------------------- ------------------- Net sales............................. $ 2,784.4 $ 2,862.7 Net income............................ $ 172.0 $ 86.4 Diluted net income per share.......... $ 1.97 $ 0.99 ACQUISITION OF PRESIDENT INTERNATIONAL, INC. On September 28, 1998, Keebler acquired President International, Inc. from President International Trade and Investment Corporation, a company limited by shares under the International Business Companies Ordinance of the British Virgin Islands, for an aggregate purchase price of $446.1 million, excluding related fees and expenses paid of $4.5 million. The acquisition of President was a cash transaction funded with approximately $75.0 million from existing resources and the remainder from borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit Facility") and a $125.0 million Bridge Facility, both dated as of September 28, 1998. The acquisition of President by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of President based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $329.2 million, which is being amortized on a straight-line basis over a forty year period. Results of operations for President from September 28, 1998 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of fiscal year 1997. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the President acquisition been effected on the assumed date. Unaudited (IN MILLIONS EXCEPT PER SHARE DATA) For the Years Ended ------------------------------------- January 2, 1999 January 3, 1998 ----------------- ----------------- Net sales................................. $ 2,583.5 $ 2,501.5 Income before extraordinary item.......... $ 104.7 $ 56.7 Net income................................ $ 102.7 $ 49.3 Diluted net income per share: Income before extraordinary item...... $ 1.20 $ 0.70 Net income............................ $ 1.18 $ 0.61 4. RESTRUCTURING AND IMPAIRMENT (CREDIT) CHARGE In May of 1999, Keebler closed its manufacturing facility in Sayreville, New Jersey, and recorded a pre-tax restructuring and impairment charge, in 1999, to operating income of $66.3 million, which consisted of an original charge of $69.2 million, slightly offset by a $2.9 million credit. In the second quarter of 2000, the charge was reduced by an adjustment of $1.0 million. The adjustment related to severance and other exit costs from the facility closure due to lower-than-expected severance costs and the earlier-than-expected sale of the facility. The restructuring and impairment charge included $19.2 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million were non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a proportionate reduction of goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996. Approximately 650 total employees were terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees were represented by unions. F-10 11 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED) The following table sets forth the activity related to the liabilities accrued in conjunction with the restructuring and impairment charge:
January 2, January 1, (IN THOUSANDS) 1999 Provision Spending Adjustment 2000 ------------ ------------ ------------ ------------ ------------ Severance............... $ $ 15,564 $ (12,442) $ (1,085) $ 2,037 Facility closure........ - 4,570 (438) (1,565) 2,567 Fixed asset impairment.. - 37,824 (37,824) - - Goodwill impairment..... - 7,600 (7,600) - - Other................... - 3,650 (1,724) (209) 1,717 ------------ ------------ ------------ ------------ ------------ Total............... $ - $ 69,208 $ (60,028) $ (2,859) $ 6,321 ============ ============ ============ ============ ============
January 1, DECEMBER 30, (IN THOUSANDS) 2000 Provision Spending Adjustment 2000 ------------ ------------ ------------ ------------ ------------ Severance............... $ 2,037 $ - $ (1,312) $ (140) $ 585 Facility closure........ 2,567 - (873) (1,556) 138 Other................... 1,717 - 45 700 2,462 ------------ ------------ ------------ ------------ ------------ Total............... $ 6,321 $ - $ (2,140) $ (996) $ 3,185 ============ ============ ============ ============ ============
At December 30, 2000, $3.1 million remained for plant and facility closing costs and severance accruals and $0.1 million for other liabilities and accruals. Only costs related to the settlement of worker's compensation claims (included in other above), and health and welfare payments are expected to extend beyond the year ended December 29, 2001. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments. TRADE ACCOUNTS RECEIVABLE Substantially all of Keebler's trade accounts receivable are from retail dealers and wholesale distributors. Keebler performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $7.3 million as of December 30, 2000 and $8.6 million as of January 1, 2000. INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 94% of total inventories at both December 30, 2000 and January 1, 2000. Because Keebler has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. There was no reserve required at December 30, 2000 and January 1, 2000 to state the inventory on a LIFO basis. At December 30, 2000 and January 1, 2000, inventories are shown net of an allowance for slow-moving and aged inventory of $8.2 million and $6.7 million, respectively. F-11 12 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Keebler often enters into exchange traded commodity futures and options contracts to protect or hedge against adverse raw material price movements related to anticipated inventory purchases. Realized gains or losses on contracts are determined based on the stated market value at the time the contracts are liquidated or expire and are deferred in inventory until the underlying raw material is purchased. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Cost of sales was increased by losses on futures and options transactions of $7.3 million, $9.2 million and $7.1 million in the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. There were no open futures or options contracts at December 30, 2000. The notional amount of open futures and options contracts at January 1, 2000 was $48.7 million. The fair values of the open futures and options contracts, based on the stated market value, was $44.1 million at January 1, 2000. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense. TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES Trademarks, trade names and other intangibles are stated at cost and are amortized on a straight-line basis over a period of twenty to forty years. Accumulated amortization of trademarks, trade names and other intangibles was $26.8 million and $18.9 million at December 30, 2000 and January 1, 2000, respectively. GOODWILL Goodwill represents the excess cost over the fair value of the tangible and identifiable intangible net assets of acquired businesses. Goodwill is amortized on a straight-line basis over a period of forty years. Accumulated amortization of goodwill was $27.8 million and $14.7 million at December 30, 2000 and January 1, 2000, respectively. REVENUE RECOGNITION Revenue from the sale of products is recognized at the time of the shipment to customers. SHIPPING AND HANDLING FEES AND COSTS The Company records all amounts billed for shipping and handling as revenues and includes the related shipping and handling costs as part of selling, marketing and administrative expenses on the Consolidated Statements of Operations. Shipping and handling costs include costs incurred to physically move finished goods from our bakeries to the customer's designated location, as well as costs incurred to store, move and prepare our products for shipment. For the years ended December 30, 2000, January 1, 2000 and January 2, 1999, shipping and handling costs were $285.8 million, $262.3 million and $221.3 million, respectively. RESEARCH AND DEVELOPMENT Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $14.2 million, $13.1 million and $10.2 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. F-12 13 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING AND CONSUMER PROMOTION Advertising and consumer promotion costs are generally expensed when incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was $81.2 million, $87.3 million and $87.2 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. There were no deferred advertising costs at December 30, 2000 and January 1, 2000. DERIVATIVE FINANCIAL INSTRUMENTS Keebler uses derivative financial instruments as part of an overall strategy to manage market risk. Keebler uses forward commodity futures and options contracts to hedge existing or future exposures to changes in commodity prices. Interest rate swap agreements are used to reduce the impact of changes in interest rates. Keebler does not enter into these derivative financial instruments for trading or speculative purposes. In June 2000, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires the recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. SFAS No. 138 addresses a limited number of issues causing implementation difficulties for numerous entities applying SFAS No. 133. The Company will adopt SFAS No. 133 for its fiscal year beginning December 31, 2000. The Company, through normal operating and financing activities, uses interest rate swap agreements and commodity futures and option contracts that are subject to SFAS No. 133. Management expects the adoption will have an insignificant impact on the Company's financial results. INCOME TAXES The consolidated financial statements reflect the application of SFAS No. 109, "Accounting For Income Taxes." Keebler files a consolidated federal income tax return. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the determination as to whether there has been an impairment of long-lived assets and the related unamortized goodwill, is based on whether certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost of any long-lived assets and the related unamortized goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. F-13 14 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment, including related accumulated depreciation follows: (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- ------------------- Land................................. $ 19,736 $ 16,290 Buildings............................ 166,787 138,288 Machinery and equipment.............. 534,976 437,032 Office furniture and fixtures........ 98,794 90,266 Delivery equipment................... 7,296 6,689 Construction in progress............. 71,324 68,156 ------------------- ------------------- 898,913 756,721 Accumulated depreciation............. (269,365) (203,690) ------------------- ------------------- Total........................... $ 629,548 $ 553,031 =================== =================== Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of three to twenty-five years. Office furniture and fixtures are depreciated over a useful life of three to fifteen years. Delivery equipment is depreciated over a useful life of two to twelve years. 7. ASSETS HELD FOR SALE On May 2, 2000, the Sayreville, New Jersey manufacturing facility, which had been held for sale after its closure, was sold for $7.5 million. The sale resulted in a pre-tax gain of approximately $2.0 million, which was recorded in other income during the second quarter of the year. Disposition of all remaining assets held for sale is expected to occur within the next thirty-six months without a significant gain or loss. 8. OTHER CURRENT LIABILITIES AND ACCRUALS Other current liabilities and accruals consisted of the following at December 30, 2000 and January 1, 2000: (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- ------------------- Self insurance reserves............. $ 52,607 $ 52,266 Employee compensation............... 83,053 72,527 Marketing and consumer promotions... 48,306 60,954 Other............................... 38,710 51,700 ------------------- ------------------- Total.......................... $ 222,676 $ 237,447 =================== =================== Keebler obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims and general, product and vehicle liability. Keebler has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions for losses expected under these programs are recorded based on Keebler's estimates of aggregate liability for claims incurred. These estimates utilize Keebler's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at December 30, 2000 and January 1, 2000 was $52.6 million and $52.3 million, respectively, and is included in other current liabilities and accruals. Keebler has collateralized its liability for potential self-insurance losses in several states by obtaining standby letters of credit which aggregate to approximately $18.5 million. F-14 15 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS DEBT Long-term debt consisted of the following at December 30, 2000 and January 1, 2000:
(IN THOUSANDS) Interest Rate Final Maturity DECEMBER 30, 2000 January 1, 2000 --------------- --------------------- -------------------- ------------------- Revolving Facility............. 6.915% September 28, 2004 $ 165,000 $ - Term Facility.................. 6.880% September 28, 2004 278,000 314,000 Senior Subordinated Notes...... 10.750% July 1, 2006 124,400 124,400 Other Senior Debt.............. Various 2001-2005 8,840 10,455 Capital Lease Obligations...... Various 2002-2042 6,405 7,588 ------------------- ------------------- 582,645 456,443 Less: Current maturities....... 55,058 37,283 ------------------- ------------------- Total..................... $ 527,587 $ 419,160 =================== ===================
At December 30, 2000 and January 1, 2000, Keebler's primary credit financing was provided by a $700.0 million Credit Facility, consisting of $350.0 million under the Revolving Facility and $350.0 million under the Term Facility. The current outstanding balance on the Term Facility at December 30, 2000 was $278.0 million, with quarterly scheduled principal payments through the final maturity of September 2004. The Revolving Facility, with an outstanding balance of $165.0 million at December 30, 2000, also has a final maturity of September 2004, but with no scheduled principal payments. Certain letters of credit totaling $27.4 million reduce the available balance on the Revolving Facility to $157.6 million. Any unused borrowings under the Revolving Facility are subject to a commitment fee. The current commitment fee may vary from 0.125% to 0.30% based on the relationship of debt to adjusted earnings. At December 30, 2000, the commitment fee was 0.125%. At January 1, 2000, the outstanding balance on the Term Facility was $314.0 million and the Revolving Facility had no outstanding balance. Certain letters of credit totaling $28.7 million reduced the available balance on the Revolving Facility to $321.3 million and any unused borrowings under the Revolving Facility were subject to a commitment fee. At January 1, 2000, the commitment fee was 0.125%. Interest on the Credit Facility is calculated based on a base rate plus applicable margin. The base rate can, at Keebler's option, be: i) the higher of the base domestic lending rate as established by the administrative agent for the lender of the Credit Facility, or the Federal Funds Rate plus one-half of one percent or ii) a reserve percentage adjusted LIBO Rate as offered by the administrative agent. The Credit Facility requires Keebler to meet certain financial covenants including debt to earnings before interest, taxes, depreciation and amortization ratio and cash flow coverage ratios. Keebler satisfied all financial covenants required for the years ended December 30, 2000 and January 1, 2000. In January 1999, Keebler entered into a Receivables Purchase Agreement ("Agreement") allowing funds to be borrowed at a lower cost to the Company. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS No. 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At December 30, 2000, a net $124.0 million of accounts receivable had been sold at fair value, which is below the maximum amount currently available under the Agreement. At January 1, 2000, a net $103.0 million of accounts receivable had been sold at fair value. In conjunction with the President acquisition in September 1998, Term Loan A was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a pre-tax extraordinary charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Loan A was issued. The related after-tax charge was $1.7 million. F-15 16 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS (CONTINUED) Interest of $46.2 million, $37.5 million and $24.0 million was paid on debt for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. Aggregate scheduled annual maturities of long-term debt as of December 30, 2000 are as follows: (IN THOUSANDS) 2001............................ $ 55,058 2002............................ 72,667 2003............................ 87,788 2004............................ 240,477 2005............................ 2,255 2006 and thereafter............. 124,400 ---------------- Total...................... $ 582,645 ================ FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments, which includes short- and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying value of cash and cash equivalents and short-term debt approximates fair value because of the short-term maturity of the instruments. The fair value of long-term debt was $526.9 million and $417.2 million at December 30, 2000 and January 1, 2000, respectively, which was based on current rates available to Keebler for debt instruments with similar terms, degrees of risk and remaining maturities. Keebler uses interest-rate swap agreements to effectively convert certain fixed rate debt to a floating rate instrument and certain floating rate debt to a fixed rate instrument. The interest rate swap agreements result in Keebler paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. The fair values of the swap agreements were obtained from the Bank of Nova Scotia and were estimated using market prices at each respective year end. The fair values of the swap agreements are not recognized in the financial statements as Keebler accounts for the agreements as hedges. There were no new swap transactions entered into during 1999 or 2000. On July 1, 1998, Keebler entered into a swap agreement with the Bank of Nova Scotia, who also serves as the administrative agent for the lenders under the Credit Facility, which matures on July 1, 2001. The swap agreement had the effect of converting the fixed rate of 10.75% on $124.0 million of the Senior Subordinated Notes to a rate of 11.772% for the year ended December 30, 2000. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap agreements with the Bank of Nova Scotia both maturing on September 30, 2004. Each swap transaction converts the base rate on $96.3 million of the Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. During the fourth quarter of 2000, the swap agreements maturing on September 30, 2004 were terminated. Upon termination, the marked-to-market value of the swaps of $4.5 million was recorded as deferred income. This deferred benefit is being amortized to income over a three month period that the underlying debt is expected to be outstanding. The debt is expected to be retired on the closing of the acquisition of Keebler by Kellogg, which is expected to occur in the first quarter of 2001. In the quarter ended December 30, 2000, $1.5 million of income was included in income from operations. The estimated fair value of the hedged swap agreements was a net payable of $1.4 million at December 30, 2000 and a net receivable of $7.9 million at January 1, 2000. F-16 17 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. DEBT AND LEASE COMMITMENTS (CONTINUED) In 2000, Keebler also maintained an interest rate swap that no longer served as a hedge with the Bank of Nova Scotia, which has a notional amount of $170.0 million and a fixed rate obligation of 5.0185% through February 1, 2001. For the years ended December 30, 2000 and January 1, 2000, $0.2 million and $2.8 million, respectively, were recognized in income from operations in order to mark-to-market the interest rate swap. As of December 30, 2000, the balance of the receivable recorded resulting from this transaction was a $0.8 million current receivable in other current assets in the consolidated balance sheet. LEASE COMMITMENTS Assets recorded under capitalized lease agreements included in property, plant and equipment consist of the following: (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- ----------------- Land......................... $ 980 $ 980 Buildings.................... 848 2,894 Machinery and equipment...... 2,049 2,842 Other leased assets.......... 1 1 -------------------- ----------------- 3,878 6,717 Accumulated depreciation..... (1,346) (417) -------------------- ----------------- Total................... $ 2,532 $ 6,300 ==================== ================= Future minimum lease payments under scheduled capital and operating leases that have initial or remaining non-cancelable terms in excess of one year are as follows: Capital Operating (IN THOUSANDS) Leases Leases -------------- -------------- 2001....................................... $ 867 $ 35,194 2002....................................... 1,248 28,220 2003....................................... 310 25,460 2004....................................... 4,708 16,780 2005....................................... 202 14,895 2006 and thereafter........................ - 25,494 -------------- -------------- Total minimum payments..................... $ 7,335 $ 146,043 Amount representing interest............... (930) ============== -------------- Obligations under capital lease............ 6,405 Obligations due within one year............ (540) -------------- Long-term obligations under capital leases. $ 5,865 ============== Rent expense for all operating leases was $57.8 million, $50.1 million and $38.7 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. 10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE In conjunction with the March 6, 2000 acquisition of Austin, Keebler has recognized estimated costs pursuant to a plan to exit certain activities of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the purchase price allocation and were equal to $14.3 million. Spending equal to $9.7 million has occurred through December 30, 2000. Staff reductions of approximately 80 non-union employees are expected as part of the exit plan. Approximately 75 employees had been terminated at December 30, 2000; the remaining terminations are expected to occur in the first quarter of 2001. The remaining spending under the exit plan is expected to be substantially complete in the next fiscal year, with only costs primarily related to health and welfare payments expected to extend beyond 2001. F-17 18 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED) During 1998, as part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Staff reductions were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with manufacturing, sales and distribution facility closings, which principally include lease termination and carrying costs. As of December 30, 2000, substantially all terminations have been made, representing approximately 150 employees under union contract and approximately 80 employees not under union contract. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. As of December 30, 2000, $4.1 million remained in reserves. The remaining spending under the plan is expected to be substantially complete before the end of 2001, with only noncancelable lease obligations to be paid over the next six years concluding in 2006. During 1996, as part of acquiring Keebler and Sunshine, management adopted and began executing a plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4 million were provided for in the allocation of the purchase price of both the Keebler and Sunshine acquisitions. Management's plan included company-wide staff reductions, the closure of manufacturing, distribution and sales force facilities and information system exit costs. Severance, outplacement and other related costs associated with staff reductions were initially estimated at $30.7 million. Costs incurred related to the closing of manufacturing, distribution and sales force facilities, which include primarily severance and lease termination and carrying costs, were expected to total $39.9 million. Approximately 1,420 employees were terminated as a result of this plan. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. During the years ended December 30, 2000 and January 2, 1999, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine acquisitions by reducing goodwill and other intangibles by $1.6 million and $3.7 million, respectively, to recognize exit costs that are expected to be less than initially anticipated. As of December 30, 2000, only noncancelable lease obligations are anticipated to extend beyond the next fiscal year, to be paid over the next six years concluding in 2006. In addition, during the years ended January 1, 2000 and January 2, 1999, Keebler expensed an additional $0.8 million and $2.8 million, respectively. These charges were principally for costs related to the closure of distribution facilities not included in the original plan adopted by management for the acquisition of Keebler Company. There was no such additional expense incurred during the year ended December 30, 2000. The following table sets forth the activity in Keebler's plant and facility closing costs and severance liabilities exclusive of the liabilities resulting from the restructuring and impairment charge recorded in 1999:
(IN THOUSANDS) January 3, 1998 Provision Spending Adjustment January 2, 1999 ----------------- -------------- -------------- -------------- ---------------- KEEBLER COMPANY Severance............ $ 231 $ 139 $ (293) $ (28) $ 49 Facility closure..... 12,505 2,662 (3,265) (418) 11,484 Other................ 1,895 - (1,689) (182) 24 ----------------- ------------- -------------- -------------- ---------------- Subtotal......... 14,631 2,801 (5,247) (628) 11,557 ----------------- ------------- -------------- -------------- ---------------- SUNSHINE BISCUITS, INC. Severance............ $ 112 $ - $ (26) $ - $ 86 Facility closure..... 7,735 - (2,388) (3,120) 2,227 ----------------- ------------- -------------- -------------- ---------------- Subtotal......... 7,847 - (2,414) (3,120) 2,313 ----------------- ------------- -------------- -------------- ---------------- PRESIDENT INTERNATIONAL, INC. Severance............ $ - $ 6,653 $ (59) $ - $ 6,594 Facility closure..... - 5,670 - - 5,670 Other................ - 447 - - 447 ----------------- -------------- -------------- -------------- ---------------- Subtotal......... - 12,770 (59) - 12,711 ----------------- -------------- -------------- -------------- ---------------- TOTAL.......... $ 22,478 $ 15,571 $ (7,720) $ (3,748) $ 26,581 ================= ============== ============== ============== ================
F-18 19 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)
(IN THOUSANDS) January 2, 1999 Provision Spending Adjustment January 1, 2000 ----------------- -------------- -------------- -------------- ---------------- KEEBLER COMPANY Severance............ $ 49 $ 25 $ (50) $ - $ 24 Facility closure..... 11,484 751 (2,646) (1,760) 7,829 Other................ 24 - (14) (10) - ----------------- ------------- -------------- -------------- ---------------- Subtotal......... 11,557 776 (2,710) (1,770) 7,853 ----------------- ------------- -------------- -------------- ---------------- SUNSHINE BISCUITS, INC. Severance............ $ 86 $ - $ (23) $ - $ 63 Facility closure..... 2,227 - (265) - 1,962 ----------------- ------------- -------------- -------------- ---------------- Subtotal......... 2,313 - (288) - 2,025 ----------------- ------------- -------------- -------------- ---------------- PRESIDENT INTERNATIONAL, INC. Severance............ $ 6,594 $ - $ (576) $ (3,189) $ 2,829 Facility closure..... 5,670 - (83) (991) 4,596 Other................ 447 - (118) (319) 10 ----------------- -------------- -------------- -------------- ---------------- Subtotal......... 12,711 - (777) (4,499) 7,435 ----------------- -------------- -------------- -------------- ---------------- TOTAL.......... $ 26,581 $ 776 $ (3,775) $ (6,269) $ 17,313 ================= ============== ============== ============== ================
(IN THOUSANDS) January 1, 2000 Provision Spending Adjustment DECEMBER 30, 2000 ----------------- -------------- -------------- -------------- ----------------- KEEBLER COMPANY Severance............ $ 24 $ - $ (4) $ - $ 20 Facility closure..... 7,829 - (1,999) (500) 5,330 ----------------- ------------- -------------- -------------- ----------------- Subtotal......... 7,853 - (2,003) (500) 5,350 ----------------- ------------- -------------- -------------- ----------------- SUNSHINE BISCUITS, INC. Severance............ $ 63 $ - $ (24) $ - $ 39 Facility closure..... 1,962 - (700) (1,116) 146 ----------------- ------------- -------------- -------------- ----------------- Subtotal......... 2,025 - (724) (1,116) 185 ----------------- ------------- -------------- -------------- ----------------- PRESIDENT INTERNATIONAL, INC. Severance............ $ 2,829 $ - $ (2,271) $ - $ 558 Facility closure..... 4,596 - (1,069) - 3,527 Other................ 10 - (10) - - ----------------- -------------- -------------- -------------- ----------------- Subtotal......... 7,435 - (3,350) - 4,085 ----------------- -------------- -------------- -------------- ----------------- AUSTIN QUALITY FOODS, INC. Severance............ $ - $ 13,774 $ (9,293) $ - $ 4,481 Facility closure..... - 479 (408) - 71 Other................ - 28 (7) - 21 ----------------- -------------- -------------- -------------- ----------------- Subtotal......... - 14,281 (9,708) - 4,573 ----------------- -------------- -------------- -------------- ----------------- TOTAL.......... $ 17,313 $ 14,281 $ (15,785) $ (1,616) $ 14,193 ================= ============== ============== ============== ================= F-19
20 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS The Retirement Plan for Salaried and Certain Hourly-Paid Employees of Keebler Company (the "pension plan") is a trusteed, noncontributory, defined- benefit pension plan. The pension plan covers certain salaried and hourly-paid employees. Assets held by the pension plan consist primarily of common stocks, government securities, bonds, mortgages and money market funds. Benefits provided under the pension plan are primarily based on years of service and the employee's final level of compensation. Keebler's funding policy is to contribute annually not less than the ERISA minimum funding requirements. The pension plan of Austin was merged with Keebler's pension plan as of the acquisition date of March 6, 2000. Additionally, effective December 31, 1998, the pension plans of President were merged with Keebler's pension plan. Pension expense included the following components:
Years Ended ------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ----------------- ----------------- ----------------- Service cost.......................................... $ 11,077 $ 13,364 $ 9,040 Interest cost......................................... 35,161 32,841 31,080 Expected return on plan assets........................ (50,077) (41,887) (39,352) Amortization of prior service cost.................... 747 689 689 Amortization of net loss.............................. - 43 - ----------------- ----------------- ----------------- Pension (benefit) expense............................. $ (3,092) $ 5,050 $ 1,457 ================= ================= =================
The expected long-term rate of return on plan assets was 9.5% for the year ended December 30, 2000, 8.7% for the year ended January 1, 2000 and 9.0% for the year ended January 2, 1999, respectively. F-20 21 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The funded status of Keebler's pension plan and amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- ------------------- Change in projected benefit obligation: Benefit obligation at beginning of year............................. $ (475,350) $ (520,312) Service cost........................................................ (11,077) (13,364) Interest cost....................................................... (35,161) (32,841) Amendments.......................................................... (2,106) - Actuarial gain...................................................... 26,596 60,261 Acquisition......................................................... (8,291) - Benefits and expenses paid.......................................... 32,766 30,009 Curtailment gain.................................................... - 897 ------------------- ------------------- Benefit obligation at year end...................................... (472,623) (475,350) ------------------- ------------------- Change in plan assets: Fair value of plan assets at beginning of year...................... 538,069 565,710 Actual return on plan assets........................................ 43,802 2,253 Employer contributions.............................................. 161 115 Acquisition......................................................... 9,642 - Benefits and expenses paid.......................................... (32,766) (30,009) ------------------- ------------------- Fair value of plan assets at year end............................... 558,908 538,069 ------------------- ------------------- Funded status....................................................... 86,286 62,719 Unrecognized actuarial gain......................................... (57,529) (37,209) Unrecognized prior service cost..................................... 9,089 7,730 Contributions subsequent to measurement date........................ - - ------------------- ------------------- Prepaid pension..................................................... $ 37,846 $ 33,240 =================== ===================
The pension plan uses the September 30 preceding the fiscal year end as the measurement date. Assumptions used in accounting for the pension plan at each of the respective year ends are as follows:
Years Ended ---------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ------------------ Discount rate......................................... 8.0% 7.5% 6.5% Rate of compensation level increases.................. 4.5 4.5 4.0
As a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan recognized a net curtailment gain of $0.1 million resulting from a liability gain of $0.9 million offset by the recognition of $0.8 million of unrecognized prior service cost. The plan assets as of December 30, 2000 and January 1, 2000 both include a real estate investment of $3.1 million in a distribution center, which is under an operating lease to Keebler. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives and an unfunded plan for certain highly compensated current and former executives ("the excess retirement plan"). Benefits provided are based on years of service. F-21 22 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The supplemental retirement plan expense includes the following components:
Years Ended ---------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ------------------ Interest cost........................................ $ 733 $ 698 $ 722 ------------------- ----------------- ------------------ Plan expense......................................... $ 733 $ 698 $ 722 =================== ================= ==================
The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 -------------------- -------------------- Change in projected benefit obligation: Benefit obligation at beginning of year............................. $ (10,233) $ (11,119) Interest cost....................................................... (733) (698) Actuarial gain...................................................... 720 944 Benefits and expenses paid.......................................... 765 640 -------------------- -------------------- Benefit obligation at year end...................................... (9,481) (10,233) Fair value of plan assets........................................... - - -------------------- -------------------- Funded status....................................................... (9,481) (10,233) Unrecognized actuarial gain......................................... (1,279) (558) Benefit payments subsequent to measurement date..................... 176 168 -------------------- -------------------- Accrued obligation.................................................. $ (10,584) $ (10,623) ==================== ====================
The excess retirement plan expense includes the following components:
Years Ended --------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ----------------- Service cost.......................................... $ 472 $ 431 $ 173 Interest cost......................................... 233 155 78 Amortization of net loss (gain)....................... 14 8 (47) ------------------- ----------------- ----------------- Pension expense....................................... $ 719 $ 594 $ 204 =================== ================= =================
The unfunded status of the excess retirement plan and the amounts recognized in the consolidated balance sheets are as follows:
(IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- -------------------- Change in projected benefit obligation: Benefit obligation at beginning of year............................. $ (3,108) $ (2,395) Service cost........................................................ (472) (431) Interest cost....................................................... (233) (155) Actuarial loss...................................................... (203) (158) Benefits and expenses paid.......................................... 181 31 ------------------- -------------------- Benefit obligation at year end...................................... (3,835) (3,108) Fair value of plan assets........................................... - - ------------------- -------------------- Funded status....................................................... (3,835) (3,108) Unrecognized actuarial loss......................................... 690 501 Benefit payments subsequent to measurement date..................... 82 17 ------------------- -------------------- Accrued obligation.................................................. $ (3,063) $ (2,590) =================== ==================== F-22
23 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The supplemental and excess retirement plans use the September 30 preceding the fiscal year end as the measurement date. Assumptions used in accounting for the supplemental and excess retirement plans for each of the respective year ends are as follows:
Years Ended --------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ----------------- Discount rate......................................... 8.0% 7.5% 6.5% Rate of compensation level increase................... 4.5 4.5 4.0
Contributions are also made by Keebler to a retirement program for Grand Rapids union employees. Benefits provided under the plan are based on a flat monthly amount for each year of service and are unrelated to compensation. Contributions are made based on a negotiated hourly rate. For the years ended December 30, 2000, January 1, 2000 and January 2, 1999, Keebler expensed contributions of $2.8 million, $2.5 million and $2.3 million, respectively. Keebler contributes to various multiemployer union administered defined-benefit and defined-contribution pension plans. Benefits provided under the multiemployer pension plans are generally based on years of service and employee age. Expense under these plans was $9.6 million, $6.8 million and $8.9 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. 12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Keebler provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion and certain union employees with ten or more years of service, is a comprehensive indemnity-type plan. The plan incorporates an up-front deductible, coinsurance payments and employee contributions which are based on length of service. The life insurance plan offers a small amount of coverage versus the amount the employees had while employed. Keebler does not fund the plan. The net periodic postretirement benefit expense includes the following components:
(IN THOUSANDS) Years Ended ------------------------------------------------------------ DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- ------------------ ------------------ Service cost..................................... $ 1,650 $ 2,178 $ 2,045 Interest cost.................................... 3,436 3,424 3,961 Amortization of prior service cost............... (1,391) (115) (115) Amortization of net gain......................... (318) (375) - -------------------- ------------------ ------------------ Net periodic postretirement benefit cost......... $ 3,377 $ 5,112 $ 5,891 ==================== ================== ==================
F-23 24 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The unfunded status of the plan reconciled to the postretirement obligation in Keebler's consolidated balance sheets is as follows:
(IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 ------------------- -------------------- Change in accumulated postretirement benefit obligation: Benefit obligation at beginning of year............................. $ (48,104) $ (56,269) Service cost........................................................ (1,650) (2,178) Interest cost....................................................... (3,436) (3,424) Amendments.......................................................... - 8,531 Actuarial gain...................................................... 1,724 717 Curtailment gain.................................................... - 108 Benefits and expenses paid.......................................... 4,990 4,411 ------------------- -------------------- Benefit obligation at year end...................................... (46,476) (48,104) Fair value of plan assets........................................... - - ------------------- -------------------- Funded status....................................................... (46,476) (48,104) Unrecognized actuarial gain......................................... (9,593) (8,187) Unrecognized prior service cost..................................... (7,506) (8,897) Benefit payments subsequent to measurement date..................... 1,567 880 ------------------- -------------------- Postretirement obligation........................................... $ (62,008) $ (64,308) =================== ====================
The plan was amended in 1999 for a change in the calculation of retiree contribution rates that resulted in an $8.5 million reduction to the benefit obligation and a corresponding decrease in unrecognized prior service cost. In addition, as a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan also recognized a net curtailment gain of $0.2 million resulting in a liability reduction of $0.1 million plus the recognition of $0.1 million of unrecognized prior service credit. The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 7.5% for the years ended December 30, 2000 and January 1, 2000 and 6.5% for the year ended January 2, 1999. The plan uses the September 30 preceding the fiscal year end as the measurement date. The weighted average annual assumed rate of increase in the cost of covered benefits was 7.0% for 2000 declining to an ultimate trend rate of 5.0% in 2002. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation for the year ended December 30, 2000 by $1.8 million and the net periodic benefit cost by $0.3 million. A 1% decrease in the trend rate for health care costs would have decreased the accumulated benefit obligation and net periodic benefit cost by $1.8 million and $0.3 million, respectively, for the year ended December 30, 2000. Keebler also provides postemployment medical benefits to employees on long-term disability. The plan is a comprehensive indemnity-type plan which covers nonunion employees on long-term disability. There is no length of service requirement. The plan incorporates coinsurance payments and deductibles. Keebler does not fund the plan. The postemployment obligation included in the consolidated balance sheets at December 30, 2000 and January 1, 2000 was $5.6 million and $5.5 million, respectively. F-24 25 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. INCOME TAXES The components of income tax expense were as shown below:
Years Ended ---------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- ----------------- ----------------- Current: Federal........................................... $ 76,242 $ 71,794 $ 58,269 State............................................. 5,452 6,739 4,618 -------------------- ----------------- ----------------- Current provision for income taxes.................. 81,694 78,533 62,887 Deferred: Federal........................................... 24,292 (4,837) 8,494 State............................................. 2,782 (521) 1,581 -------------------- ----------------- ----------------- Deferred provision for income taxes................. 27,074 (5,358) 10,075 -------------------- ----------------- ----------------- $ 108,768 $ 73,175 $ 72,962 ==================== ================= =================
The differences between the income tax expense calculated at the federal statutory income tax rate and Keebler's consolidated income tax expense are as follows:
Years Ended ---------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ------------------ U.S. federal statutory rate........................ $ 99,526 $ 56,483 $ 59,339 State income taxes (net of federal benefit)........ 9,547 5,849 5,813 Intangible amortization............................ 4,602 6,306 3,160 All others......................................... (4,907) 4,537 4,650 ------------------- ----------------- ------------------ $ 108,768 $ 73,175 $ 72,962 =================== ================= ==================
Included in the $4.9 million credit to the consolidated income tax expense for the year ended December 30, 2000, were a research and development credit and the recognition of satisfactory resolution of certain income tax contingencies. The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:
(IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 -------------------- -------------------- Depreciation....................................................... $ (76,115) $ (57,604) Trademarks, trade names and intangibles............................ (67,591) (64,887) Prepaid pension.................................................... (15,028) (13,327) Inventory valuation................................................ (2,135) (559) Other.............................................................. (399) (10,503) -------------------- -------------------- (161,268) (146,880) -------------------- -------------------- Postretirement/postemployment benefits............................. 25,860 26,778 Plant and facility closing costs and severance..................... 8,330 17,469 Workers' compensation.............................................. 6,711 5,695 Incentives and deferred compensation............................... 10,594 7,801 Employee benefits.................................................. 11,668 11,000 -------------------- -------------------- 63,163 68,743 -------------------- -------------------- $ (98,105) $ (78,137) ==================== ====================
Income taxes paid, net of refunds, were approximately $103.9 million, $49.6 million and $67.1 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. F-25 26 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SHAREHOLDERS' EQUITY COMMON STOCK Cash dividends of $38.0 million were paid during the year ended December 30, 2000 while no cash dividends were declared for the years ended January 1, 2000 or January 2, 1999. Keebler's ability to pay cash dividends is limited by the Credit Facility and the Senior Subordinated Notes. The most limiting dividend restriction exists under the Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50% of consolidated cumulative net income, (ii) net cash proceeds received from the issuance of capital stock, (iii) net cash proceeds received from the exercise of stock options and warrants, (iv) net cash proceeds received from the conversion of indebtedness into capital stock and (v) the net reduction in investments made by Keebler. TREASURY STOCK In March 1998, Keebler's Board of Directors authorized the repurchase, at management's discretion, of up to $30.0 million of shares of the Company's common stock. Keebler purchased the authorized shares during 1998 and 1999, which fulfilled the treasury stock plan. In the first quarter of the current year, 353,625 shares were purchased back into treasury at a cost of $10.0 million resulting in 1,334,382 treasury shares held at April 22, 2000. No additional treasury stock activity occurred subsequent to the first quarter of 2000. The share repurchase program was primarily instituted to offset dilution, which may result from the exercise and sale of shares related to employee stock options. The repurchases of shares of common stock are recorded as treasury stock using the cost method and result in a reduction of shareholders' equity. Should the treasury shares be reissued, Keebler intends to use a first-in, first-out method of reissuance. 15. STOCK OPTION PLAN Keebler has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of options equals the fair value (market value) of the underlying stock options at the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if Keebler had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table summarizes the pro forma disclosures regarding net income and earnings per share for the years ended December 30, 2000, January 1, 2000 and January 2, 1999:
(IN THOUSANDS EXCEPT PER SHARE DATA) Years Ended ----------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- ------------------ ----------------- Net income: As reported..................................... $ 175,592 $ 88,205 $ 94,871 Pro forma....................................... $ 172,869 $ 86,890 $ 91,032 Basic net income per share: As reported..................................... $ 2.07 $ 1.05 $ 1.14 Pro forma....................................... $ 2.05 $ 1.04 $ 1.09 Diluted net income per share: As reported..................................... $ 2.00 $ 1.01 $ 1.08 Pro forma....................................... $ 1.96 $ 0.99 $ 1.04 Weighted average grant date fair value of options granted during the year......................... $ 10.17 $ 11.88 $ 8.53
F-26 27 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK OPTION PLAN (CONTINUED) These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, which is variable, and additional options may be granted in future years. In 2000, 1999 and 1998, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because Keebler's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For options granted, the following weighted average assumptions were used to determine the fair value:
Years Ended ----------------------------------------------------------- DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- ------------------ ----------------- Dividend yield............................ 1.1% 0.0% 0.0% Expected volatility....................... 31.6% 24.8% 27.2% Risk-free interest rate................... 5.84% 5.76% 5.04% Expected option life (years).............. 5 5 5
Under Keebler's 1996 Stock Option Plan, 9,673,594 shares of Keebler's stock were authorized for future grant. All options granted have ten year terms and, due to acceleration resulting from the achievement of certain performance measures, vest by 2001. The following table summarizes the 1996 Stock Option Plan activity:
Year Ended January 2, 1999 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... 6,852,344 $ 2.01 Granted....................................................................... - - Exercised..................................................................... 351,177 2.21 Forfeited..................................................................... 44,887 3.23 Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 6,456,280 $ 1.99 ================== Exercisable at the period end................................................. 4,433,774 $ 1.98 ================== - ------------------------------------------------------------------------------------------------------------------------
Year Ended January 1, 2000 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... 6,456,280 $ 1.99 Granted....................................................................... - - Exercised..................................................................... 491,570 2.23 Forfeited..................................................................... 45,081 1.93 Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 5,919,629 $ 1.97 ================== Exercisable at the period end................................................. 4,493,801 $ 1.96 ================== - ------------------------------------------------------------------------------------------------------------------------
F-27 28 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK OPTION PLAN (CONTINUED)
YEAR ENDED DECEMBER 30, 2000 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ Outstanding at the beginning of the period.................................... 5,919,629 $ 1.97 Granted....................................................................... - - Exercised..................................................................... 1,608,846 1.98 Forfeited..................................................................... - - Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 4,310,783 $ 1.97 ================== Exercisable at the period end................................................. 3,366,458 $ 1.96 ================== - ------------------------------------------------------------------------------------------------------------------------
Exercise prices as of December 30, 2000, for options outstanding under the 1996 Stock Option Plan ranged from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately five and one-half years. Under Keebler's 1998 Omnibus Stock Incentive Plan, 6,500,000 shares of Keebler's stock were authorized for future grant. All options granted generally have ten year terms and vest at the end of five years. Vesting can be accelerated if certain stock price performance measures are met. The following table summarizes the 1998 Omnibus Stock Incentive Plan activity:
Year Ended January 2, 1999 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... - $ - Granted....................................................................... 2,737,836 25.03 Exercised..................................................................... - - Forfeited..................................................................... 22,200 27.31 Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 2,715,636 $ 25.01 ================== Exercisable at the period end................................................. - $ - ================== - ------------------------------------------------------------------------------------------------------------------------
Year Ended January 1, 2000 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... 2,715,636 $ 25.01 Granted....................................................................... 270,234 34.98 Exercised..................................................................... 39,140 24.82 Forfeited..................................................................... 123,634 25.27 Expired....................................................................... 5,494 27.31 ------------------ Outstanding at the end of the period.......................................... 2,817,602 $ 25.96 ================== Exercisable at the period end................................................. 899,699 $ 25.74 ================== - ------------------------------------------------------------------------------------------------------------------------ F-28
29 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK OPTION PLAN (CONTINUED)
YEAR ENDED DECEMBER 30, 2000 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ Outstanding at the beginning of the period.................................... 2,817,602 $ 25.96 Granted....................................................................... 89,362 29.59 Exercised..................................................................... 126,087 26.01 Forfeited..................................................................... 83,753 28.54 Expired....................................................................... 6,814 29.63 ------------------ Outstanding at the end of the period.......................................... 2,690,310 $ 25.98 ================== Exercisable at the period end................................................. 1,746,676 $ 25.98 ================== - ------------------------------------------------------------------------------------------------------------------------
Exercise prices as of December 30, 2000, for options outstanding under the 1998 Omnibus Stock Incentive Plan ranged from $24.00 to $42.41. The weighted average remaining contractual life of these options is approximately four years. Under Keebler's Non-Employee Director Stock Plan, 300,000 shares of Keebler's stock were authorized for future grant. All options granted have ten year terms and vest automatically upon grant. The following table summarizes the Non-Employee Director Stock Plan activity:
Year Ended January 2, 1999 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... - $ - Granted....................................................................... 22,500 27.44 Exercised..................................................................... - - Forfeited..................................................................... - - Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 22,500 $ 27.44 ================== Exercisable at the period end................................................. 22,500 $ 27.44 ================== - ------------------------------------------------------------------------------------------------------------------------
Year Ended January 1, 2000 -------------------------------------- Weighted Average Options Exercise Price ------------------ ------------------ Outstanding at the beginning of the period.................................... 22,500 $ 27.44 Granted....................................................................... 7,500 30.75 Exercised..................................................................... - - Forfeited..................................................................... - - Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 30,000 $ 28.27 ================== Exercisable at the period end................................................. 30,000 $ 28.27 ================== - ------------------------------------------------------------------------------------------------------------------------
F-29 30 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. STOCK OPTION PLAN (CONTINUED)
YEAR ENDED DECEMBER 30, 2000 -------------------------------------- WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ Outstanding at the beginning of the period.................................... 30,000 $ 28.27 Granted....................................................................... 5,250 25.75 Exercised..................................................................... - - Forfeited..................................................................... - - Expired....................................................................... - - ------------------ Outstanding at the end of the period.......................................... 35,250 $ 27.89 ================== Exercisable at the period end................................................. 35,250 $ 27.89 ================== - ------------------------------------------------------------------------------------------------------------------------
Exercise prices as of December 30, 2000 for options outstanding under the Non-Employee Director Stock Plan ranged from $25.75 to $30.75. The weighted average remaining contractual life of these options is approximately seven and one-half years. 16. NET INCOME PER SHARE Basic net income per share is calculated using the weighted average number of common shares outstanding during each period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during each period. The common equivalent shares arise from the 1996 Stock Option Plan, the 1998 Omnibus Stock Incentive Plan, the Non-Employee Director Stock Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method. The following table sets forth the computation of basic and diluted net income per share:
Years Ended ----------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 -------------------- ------------------ ----------------- NUMERATOR: Income before extraordinary item................. $ 175,592 $ 88,205 $ 96,577 Extraordinary item, net of tax................... - - 1,706 -------------------- ------------------ ----------------- Net income....................................... $ 175,592 $ 88,205 $ 94,871 ==================== ================== ================= DENOMINATOR: Denominator for Basic Net Income Per Share Weighted Average Shares..................... 84,517 83,759 83,254 Effect of Dilutive Securities: Stock options............................... 3,323 3,886 3,992 Warrants.................................... - - 240 -------------------- ------------------ ----------------- Diluted potential common shares............. 3,323 3,886 4,232 -------------------- ------------------ ----------------- Denominator for Diluted Net Income Per Share..... 87,840 87,645 87,486 ==================== ================== =================
For the year ended December 30, 2000, there were weighted average options to purchase 148,990 shares of common stock at an exercise price ranging from $36.19 to $42.41, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. For the year ended January 1, 2000, there were weighted average options to purchase 143,122 shares of common stock at an exercise price ranging from $32.13 to $39.25, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. For the year ended January 2, 1999, there were weighted average options to purchase 96,478 shares of common stock at an exercise price ranging from $28.88 to $32.13, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. F-30 31 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION In 1998, Keebler adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." Keebler's reportable segments are Branded and Specialty. The reportable segments were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie and cracker products to retail outlets. Either a Keebler sales employee or a distributor sells products in the Branded segment. The sales channels in the Specialty segment primarily sell cookies, crackers and brownie products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.), as well as cookies manufactured for the Girls Scouts of the U.S.A. Many of the products sold by the Specialty segment are done so through the use of brokers. Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. The accounting policies for each reportable segment are the same as those described for the total company in Note 4 "Summary of Significant Accounting Policies." The cost of sales, however, used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated income from operations. There are no intersegment transactions that result in revenue or profit (loss). Asset information by reportable segment is not presented as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold, as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the years ended December 30, 2000, January 1, 2000 and January 2, 1999. Prior year numbers have been restated for reclassifications between reportable segments.
Branded Specialty (IN THOUSANDS) Segment Segment Other (1) Total ------------- ------------- ------------- ------------- YEAR ENDED DECEMBER 30, 2000: NET SALES TO EXTERNAL CUSTOMERS........... $ 2,123,723 $ 633,227 $ - $ 2,756,950 DEPRECIATION EXPENSE...................... 25,334 11,413 34,379 71,126 PROFIT CONTRIBUTION....................... 390,848 128,243 - 519,091 YEAR ENDED JANUARY 1, 2000: Net sales to external customers........... $ 2,020,528 $ 647,243 $ - $ 2,667,771 Depreciation expense...................... 21,210 8,307 35,017 64,534 Profit contribution....................... 350,657 108,895 - 459,552 YEAR ENDED JANUARY 2, 1999: Net sales to external customers........... $ 1,726,668 $ 499,812 $ - $ 2,226,480 Depreciation expense...................... 23,690 7,846 27,867 59,403 Profit contribution....................... 282,639 85,898 - 368,537 - --------------------------------------------- (1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.
F-31 32 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED) The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated income from continuing operations before income tax expense for the years ended December 30, 2000, January 1, 2000 and January 2, 1999 is as follows:
Years Ended --------------------------------------------------------- (IN THOUSANDS) DECEMBER 30, 2000 January 1, 2000 January 2, 1999 ------------------- ----------------- ----------------- INCOME BEFORE INCOME TAX EXPENSE: Reportable segments' profit contribution............ $ 519,091 $ 459,552 $ 368,537 Unallocated functional support costs (2)............ 191,616 195,649 172,498 Restructuring and impairment (credit) charge........ (996) 66,349 - Interest expense, net............................... 44,111 36,174 26,500 ------------------- ----------------- ----------------- Income before Income Tax Expense................. $ 284,360 $ 161,380 $ 169,539 =================== ================= =================
(2) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments. Net sales to external customers consist of cookies, crackers and other baked goods for all periods presented. All long-lived assets at December 30, 2000, January 1, 2000 and January 2, 1999 are located in the United States. Net sales to external customers made outside the United States, as well as to any single customer, are not material to consolidated net sales for the years ended December 30, 2000, January 1, 2000 and January 2, 1999. 18. UNAUDITED QUARTERLY FINANCIAL DATA Results of operations for each of the four quarters of the fiscal years ended December 30, 2000 and January 1, 2000 follow. Each quarter represents a period of twelve weeks except the first quarter which consists of sixteen weeks.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 ----------------- ----------------- ----------------- ----------------- (IN MILLIONS EXCEPT PER SHARE DATA) 2000* 1999 2000 1999 2000 1999 2000 1999 -------- -------- -------- -------- -------- -------- -------- -------- Net sales...................................... $855.9 $852.0 $613.6 $587.9 $642.2 $615.8 $645.3 $612.1 Gross profit................................... 492.5 471.3 360.2 330.5 388.0 354.6 397.2 360.8 Restructuring and impairment (credit) charge... - - (1.0) 69.2 - - - (2.9) Net income (loss).............................. $47.5 $32.7 $33.4 $(21.4) $41.0 $32.1 $53.7 $44.8 Basic net income per share: Net income (loss)........................... $0.57 $0.39 $0.39 $(0.25) $0.48 $0.38 $0.63 $0.53 ======== ======== ======== ======== ======== ======== ======== ======== Diluted net income per share: Net income (loss)........................... $0.55 $0.37 $0.38 $(0.24) $0.46 $0.37 $0.61 $0.51 ======== ======== ======== ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------------- * Quarter 1, 2000 includes the operating results of Austin from the acquisition date of March 6, 2000 through April 22, 2000.
F-32 33 KEEBLER FOODS COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SALES INCENTIVES In November 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which addresses the recognition, measurement and income statement classification for certain sales incentives offered by vendors (including manufacturers) that have the effect of reducing the price of a product or service to a customer at the point of sale. For cash sales incentives within the scope of Issue No. 00-14, costs are generally recognized at the date on which the related revenue is recorded and is to be classified as a reduction in revenue. Upon adoption of Issue No. 00-14, which becomes effective on June 30, 2001, prior year financial statements will be restated for comparative purposes. The Company records coupon redemption expense within selling, marketing and administrative expenses on the Consolidated Statements of Operations. These sales incentives offered by the Company have the effect of reducing the price of a product to a customer at the point of sale. Coupon redemption expense was $22.7 million, $20.1 million and $21.7 million for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. * * * * * F-33 -----END PRIVACY-ENHANCED MESSAGE-----